This Market Has Become the Dow and S&P Show

Last week, when we saw the Investors Intelligence Bulls move up to their highest level since 1987, I noted that when this extreme reading occurred in late January 1987, the market had a 4% pullback followed by an 11% rally. That 11% rally quickly became an 11% decline when the market finally corrected, retreating the S&P right back to where it had been when the bulls peaked.

This weekend I decided to go look and see what the McClellan Summation Index was doing at the time, perhaps it was instructive for the current period. It turns out the Summation Index peaked about three weeks after the Investors Intelligence Bulls tagged 64%. It barely had an uptick once the rollover began (box A on the chart). The S&P rallied another 5% over the course of the next month. But the average stock had already peaked, and rolled over from that rally. Thus the sentiment was in fact a good warning that things had gotten far too giddy.

Then look over at Box B and you can see the rollover in the Summation Index was coincident with the S&P; this time, though, the S&P was at a much higher high, while the Summation Index was at a lower high. Now notice that the rally in late September in the S&P saw barely a blip upward in the Summation Index. Again, the Summation Index was an early warning sign.

I bring all of this up again because the McClellan Summation Index has rolled over in the last week. In the last two weeks we have seen the market become the Dow and S&P show. Take a look at the action in the S&P and the action in the cumulative advance/decline line and you can see the divergence that has taken place since mid-February. The S&P is up about 2% and the breadth is flat.

In that same time, the Russell is down a few points. In that same time, Nasdaq has gained a mere five points. And the aforementioned Summation Index has rolled over. It will now take a net differential of +1500 advancers minus decliners to turn this back up. It is doable, but the difference between now and the attempt at rolling over in late January is that in those final two weeks of January the S&P had chopped about, and now it has rallied 2%. So the divergence is growing now where in late January it was mimicking the S&P.

How long can the divergence go on? As I noted in last Friday's column, the past few years have seen the divergence continue for months. It's difficult for generals to battle without the troops.

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